Top Treasury Official Defends 401(k) Tax Proposal, FSOC Moves

WASHINGTON -- Venturing into what might seem like hostile territory, a top Treasury Department official sat for an on-stage interview at the opening day of the annual general membership meeting of the Investment Company Institute, a group that has reacted critically to several financial regulatory initiatives undertaken by the Obama administration.

Mary John Miller, a veteran of the asset-management industry who now serves as Treasury's under secretary for domestic finance, offered a defense of a number of administration policies that could affect advisors, including the proposed caps on tax-deferred retirement contributions and proposals to strengthen regulation of money market mutual funds.

ICI President and CEO Paul Schott Stevens asked Miller about the budget proposal the White House offered last month, which included a provision that would cap individuals' lifetime tax-preferred 401(k) contributions at $3 million, along with other measures the group warns could erode the availability of employer-sponsored retirement plans and workers' participation in them.

Miller began with the premise that any effort to bring the nation's fiscal situation into order must include a mixture of spending cuts and revenue increases, noting that the cap on the 401(k) tax break is projected to generate some $9 billion in revenue over the next 10 years.

"To be fair, he is not talking about raising rates, he is talking about broadening the base," she said of Obama's tax proposal.

Further, echoing a theme from Obama's reelection campaign, Miller pointed to a widening gap between the very wealthy and the rest of the population, noting that the proposed modifications to retirement plan taxes would only affect a fraction of 1% of the country.

"The impact of it seems rather small in terms of the universe of savers, and I think the fact is the group -- the highest income group -- probably saves outside their tax-deferred vehicles," Miller said. "It is never our intention to discourage savings, particularly in their retirement savings, but I think, again, you have to look for opportunity to where you can find ways to raise revenue in the picture that we're in right now."

Miller also addressed the Treasury Department's role in leading the interagency Financial Stability Oversight Council, or FSOC. That group, chartered by the Dodd-Frank Act to help guard against destabilizing forces that could disrupt the markets, has been identifying industry players deemed systemically important financial institutions (SIFIs), entities whose collapse could trigger another crisis. The SIFI designation subjects a financial institution to an added layer of oversight, and there has been considerable concern among industry players about what non-bank entities could be included in that category.

Asked about the potential for funds and fund advisors to be classified as SIFIs, Miller demurred, though she offered a modest assurance that regulators recognize that there are significant distinctions between advisors and wealth managers and the big banks and insurance providers.

"The designation process is intended to cast the net in such a way that we don't have large non-bank financial institutions that stand outside of any comprehensive regulatory oversight," Miller said. "At the time we said the asset management industry is different. It doesn't fit these criteria and we recognize that."

Miller said that the jury is still out on how asset managers will be classified. The FSOC asked the Office of Financial Research, another product of Dodd-Frank organized under the Treasury Department that Miller described as a "good, neutral arbiter," to gather more information on the asset management sector and report back it findings.

The FSOC is also helping oversee the development of a series of policy proposals to give further stability to money market mutual funds, another area of concern for ICI, which has warned that overreaching regulations could effectively knock the asset class off the market.

"Are we destined inevitably to see this sector drastically shrink as a result of the next phase of regulation?" asked ICI's Stevens.

"We certainly value the importance of money market funds and the role that they play in the financial system," Miller responded, saying that Treasury is committed to preserving the funds but adamant that stronger stabilizing safeguards must be put into place.

"We have been all about trying to find that right outcome where we can, you know, enjoy the benefits of money market funds and what they do for the economy, for investors, for your businesses," Miller said. "But at the same time we need to address these structural risks that the regulators have identified."

She credited the Securities and Exchange Commission for its preliminary work in 2010 reviewing the sector with an eye toward stronger oversight, but said that the agency did not go far enough. But Miller indicated that the SEC, now with a new permanent chairman -- Mary Jo White, who is set to make her first public remarks since her Senate confirmation here at the ICI conference on Friday -- could ultimately take the lead in revamping the regulations for money market funds.

"We would gladly step aside if the SEC, which is the primary regulator in this area, decides to move forward," Miller said.